Fewer banks at risk of failure
In the July to September quarter, the industry’s earnings reached $37.6 billion, up from $35.3 billion a year earlier. It was the best showing since the July-September quarter of 2006, long before the financial meltdown. By contrast, at the depth of the Great Recession in the last quarter of 2008, the industry lost $32 billion.
Banks are lending a bit more freely. The value of loans to consumers rose 3.2 percent in the 12 months that ended Sept. 30 compared with the previous 12 months, according to data from the Federal Deposit Insurance Corp. More lending fuels more consumer spending, which drives about 70 percent of economic activity. At the same time, overall lending remains well below levels considered healthy over the long run.
Fewer banks are considered at risk of failure. In July through September, the number of banks on the FDIC’s confidential “problem list” fell for a sixth straight quarter. These banks numbered 694 as of Sept. 30 — about 9.6 percent of all federally insured banks. At its peak in the first quarter of 2011, the number of troubled banks was 888, or 11.7 percent of all federally insured institutions.
Bank failures have declined. In 2009, 140 failed. In 2010, more banks failed — 157 — than in any year since the savings and loan crisis of the early 1990s. In 2011, regulators closed 92. This year, the number of failures has trickled to 51. That’s still more than normal. In a strong economy, an average of only four or five banks close annually. But the sharply reduced pace of closings shows sustained improvement.
Less threat of loan losses. The money banks had to set aside for possible losses fell 15 percent in the July-September quarter from a year earlier. Loan portfolios have strengthened as more customers have repaid on time. Losses have fallen for nine straight quarters. And the proportion of loans with payments overdue by 90 days or more has dropped for 10 straight quarters.
“We are definitely on the back end of this crisis,” said Josh Siegel, chief executive of Stonecastle Partners, a firm that invests in banks.
The biggest boost for banks is the gradually strengthening economy. Employers added nearly 1.7 million jobs in the first 11 months of 2012. More people employed mean more people and businesses can repay loans. And after better-thanexpected economic news last week, some analysts said the economy could end up growing faster in the October to December quarter — and next year — than previously thought.
That assumes Congress and the White House can strike a budget deal to avert the “fiscal cliff” — the steep tax increases and spending cuts that are set to kick in Jan. 1. If they don’t reach a deal, those measures would significantly weaken the economy.
Banks have also been bolstered by higher capital, their cushion against risk. Banks boosted capital 3.8 percent in the third quarter, FDIC data show. And the industry’s average ratio of capital to assets reached a record high.
On the other hand, many banks are no longer benefiting from recordlow interest rates. They still pay almost nothing to depositors and on money borrowed from other banks or the government. But steadily lower rates on loans other than credit cards have reduced how much banks earn.
“This interest-rate pressure on the banks becomes very difficult to overcome,” said Fred Cannon, chief equity strategist and director of research at Keefe, Bruyette & Woods. “It’s a big headwind for banks.”
Many banks have reported lower net interest margin — the difference between the income they receive from loans and the interest they pay depositors and other lenders. It’s a key measure of a bank’s profitability.